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Tickers in this Article: BJRI, TXRH
Texas Roadhouse Inc. (TXRH) recently posted second quarter 2012 earnings of 28 cents per share, which surpassed the Zacks Consensus Estimate of 24 cents and grew 28.0% year over year. The better-than-expected results were attributable to strong revenue growth as well as healthy restaurant margins.

Total revenue climbed 15.0% from the prior-year quarter to $320.3 million, which missed the Zacks Consensus Estimate of $321.0 million. The upside was attributable to higher comparable sales growth. Comparable restaurant sales (comps) grew 4.5% at company-owned restaurants (versus 4.4% in year-earlier period) and 4.8% at franchised restaurants (versus 3.6%). Overall company-owned restaurant sales increased 14.6% to $317.5 million, whereas franchise royalties and fees increased 9.7% to $2.7 million.

During the quarter, restaurant operating margin were up 91 basis points (bps) to 19.1% driven by a 56 bps decrease of in labor cost, 5 bps dip in rent and 66 bps reduction in other operating costs, partially offset by a 35 bps increase in cost of sales.

Store Update

During the quarter, the Louisville, Kentucky-based company opened 7 company-owned restaurants but did not open any franchised restaurant. The company did not close any unit. It remains on track to ramp up its development pipeline in 2012 and 2013.

Management's 2012 goal includes 25 unit openings, reflecting a 25% growth from the unit base in 2011. At the end of the quarter, Texas Roadhouse operated 306 company-owned and 72 franchised restaurants.

Financial Position

Texas Roadhouse ended the quarter with cash and cash equivalents of $77.2 million and total long-term debt of $51.4 million.

The company did not buyback any shares during the quarter, leaving $100 million available under the current authorization.

Outlook

Including legal settlement charges, management currently expects fiscal 2012 earnings in the range of 94-96 cents (higher than the previously stated range of 91-93 cents). The company expects food cost inflation to moderate slightly in fiscal 2012 and come around 7.0% which sits on the low end of the earlier range of 7.0%-7.5%. Texas Roadhouse expects its comparable-store sales to grow by 4-4.5% range. Average check growth is expected to slow down to 3% in the third quarter and 2.5% in the fourth quarter as against 4% recorded in the first half of 2012.

Capital expenditure is expected to be around $90.0 million for fiscal 2012, higher than the previously announced range of $80.0-$85.0 million.

Our Take

Texas Roadhouse's top-line momentum is in place, as is evident from the continuous rise in comparable sales. The company, which offers specially seasoned steaks, witnessed about 5.5% increase in its comparable restaurant sales for the first four weeks of the third quarter of 2012 after considering a beneficial impact from the 4th of July holiday. This trend calls for a sustained comps growth in third quarter. The company is also assessing the opportunity for pricing action in 2013.      

Financially, the company is in a relatively strong position and continues to enhance shareholder value with dividend distribution.

On the flip side, like many of its restaurant peers, the company is also reeling under the pressure of rising input costs. For 2012, the food cost environment remains more expensive compared to 2011 in terms of beef cost pressure. Although management has marginally slashed its guidance for food cost inflation, it is still believed to be quite high. This, coupled with slowing traffic and check growth, could suppress margins expansion ahead.  

With the expiration of certain federal tax benefits at the end of 2011, the company will now have to grapple with the rise in income tax rate in 2012. Management expects increased tax rate to affect full year 2012 earnings per share by around 4 cents. Lower consumer spending amid macroeconomic uncertainty and intense competition among restaurateurs remain another drag on the stock.

Texas Roadhouse, which competes with BJ's Restaurants Inc. (BJRI), currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.
 

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